Twitter is powerful, but where are the profits?

November 6, 2013

Protesters famously used Twitter to organize during the Arab Spring three years ago. President Barack Obama announced his 2012 re-election victory using the short messaging service. Lady Gaga tweets. So does the pope.

But for all its power and reach, Twitter gushes losses - $65 million in the third quarter, nearly three times more than it lost a year ago.

Article Photos

AP PHOTOIn this Monday, photo, a woman stands across the street from Twitter headquarters in San Francisco. As Wall Street analysts size up Twitter ahead of its first public stock sale this week, more than a few are expressing concern about the company's lack of profits.

As Wall Street analysts size up Twitter ahead of its first public stock sale this week, more than a few are expressing concern about the company's lack of profits.

Those misgivings are echoed by average investors. Some 47 percent of Americans believe Twitter won't be a good investment, according to a recent AP-CNBC poll.

Of course, a company's pre-IPO losses are no indication its stock will do poorly. Amazon.com had big losses before it went public 16 years ago and still occasionally posts them. Yet its stock is up more than 18,000 percent since the IPO.

Even so, future Twitter shareholders poring over the company's more than 200-page IPO document are being asked to take a leap of faith. The document never makes clear when the company will sell enough ads to stanch the red ink and deliver sustainable profits.

What's Twitter's sales pitch to potential investors?

"They're taking you to the edge of a swamp and saying, 'Someday, this is going to be paradise,'" says Anthony Catanach, a professor of accounting at Villanova University.

Pessimists who have gazed at that swamp believe Twitter is going public too soon but can't resist exploiting a market in which investors are eager to look past losses as stock prices soar to record highs. Optimists refuse to believe a company that has turned itself into a worldwide water cooler in just seven years can't make big money - at least someday.

"Twitter is in its infancy, and it's a site a lot more people will go to," says Michael Pachter, an analyst at Wedbush Securities. "They'll figure out how to sell advertising."

Many money managers seem to agree. In a reflection of high demand from them for the stock, Twitter on Monday said it expected to sell stock for as much as $25 per share in the IPO, up from its previous estimate of $20.